Wednesday, January 09, 2008

Second Life bans virtual banks..

.. reports the Register.

That's only banks practicing only in virtuality - LInden dollar lenders and investors - according to El Reg - "meatspace" licensed banks are allowed to continue to operate. The reason given is that virtual banks were proving unstable due to offering riunous rates of return on invested Linden dollars.

"Since the collapse of Ginko Financial in August 2007, Linden Lab has received complaints about several in-world 'banks' defaulting on their promises. These banks often promise unusually high rates of L$ return, reaching 20, 40, or even 60 percent annualized," wrote Ken D., yesterday.

"Linden Lab isn’t, and can’t start acting as, a banking regulator," he added.

Which is interesting given a question that floated my way over the holidays: are virtual worlds , like Linden Labs, which issue widely used in-game currencies, convertible to and purchasable with real-world currencies, issuers of "electronic money"? And if hould they be regulated as deposit-taking baks are - or alternately do they fall within specialised regulatory schemes like the well-known if under-used EC Electronic Money Issuer Directive?

The EMI Directive was originally clearly intended to regulate "digital cash" issued on stored-value smart cards, as with the MOndex scheme rolled out in the early 2000s. Such schemes have never really caught on (though are arising again in the form of transport stored value cards like Oyster) - but the EMI has since been used to regulate quite different paradigms of electronic money such as the Pay pal business.

One point, as the Register notes, is that Linden Labs themselves clearly do not intend to hold themselves out as an EMI (or in the US perhaps, simply a bank). Their own terms and conditions say:

""Linden Dollars are not money, they are neither funds nor credit for funds. Linden Dollars represent a limited license right to use a feature of the simulated environment. Linden Lab does not offer any right of redemption for any sum of money, or any other guarantee of monetary value, for Linden Dollars."

On the other hand it is a notable feature of both ordinary money and EMIDir "electronic money" that it can be redeemed for face value against the issuer at any time, and this is right ("claim" according to the EMI Dir). For more erasons why 2L is probably not an EMI, see the useful chapter by Guadamuz and Usher in (ahem) Edwards ed The New Legal Framework for e-commerce in Europe.

Pangloss wonders what each virtual bank's T & C say about redemption in the event of the bank being closed down involuntarily by the platform host virtual world. The point of both banking and EMI regulation is at least partially to ensure that in the event of bank failure or closure, capital reserves must be maintained such that users at least get their stakes back. If that matter is left purely to contract however, it might be quite legal for Virtual Bank of Third Life (say) to provide that in the event of closure by platform world, all reserves are void. Or it might simply have run out of money - a run on the banks will no doubt by now already have started - as El Reg add "Linden Labs has requested that the virtual banks settle up with investors by January 22, honoring withdrawals. That should be interesting." Indeed.

If banks do not pay up and Second Life will not intervene to protect their users, relying on their stance that they are neither a money issuer nor a bank regulator - Would real space governments be prepared to get involved ? Eat your heart out, Northern Rock:)

1 comment:

Anonymous said...

As an internet lawyer, you will be interested in this post about an internet radio streamer called Pandora having to pull its feed into the UK from the US

Seems like there is not a lot of time to save them